Question

With free entry:

a)there is a known and limited number of potential suppliers that can produce a good in the long run.

b)there is an unlimited number of firms that can produce a good in the long run.

c)the long run market supply curve is vertical at the market quantity.

d)the long run market demand curve is horizontal at the market price.

Answer 1

a. By the word itself, we can understand that free entry refers to condition wherein it is assumed that there are a huge number of sellers, generally limitless. As free entry in a market means that there are no restrictions to enter as well as exit the market, it cannot be true to say that there is a known and limited potential suppliers that can produce in the long run.

b. As in the long run, the demand curve becomes horizontal at the market price, this is not the correct answer.

c. No, the long run supply curve in a free entry market structure would be sloping downwards, upwards and be in a flat portion. The supply curve in this situation would have the three types of curve. Therefore, this option is not the correct one.

d. As we know that when a market has a free entry it means that firms do not have restrictions to produce or sell in the market. And new firms enter the market when the old or existing ones are running into profits through which they get even more attracted. It is assumed that when a market has free entry, which is generally in the perfectly competitive market structure, there are a lot of sellers and customers. Also, free entry means that the barriers to enter the market are very low which indicates that the goods and services supplied here are of a huge quantity and everyone has the essential information regarding the products supplied. We can also assume the firms to be less influential specially when it comes to the price of the product and all the products produced here are generally a close substitute to each other. Thus, even a little rise in the price of a product would lead to a fall in the quantity demanded by the consumers. Hence, it all concludes that in a free entry, the long-run market demand curve is represented by a horizontal line at the market price and it makes this option the correct option.